What is a foreclosure?

If you can’t pay your mortgage, your home could end up in foreclosure.

Foreclosure is a process where the homeowner can lose possession of the home after failing to make payments and defaulting on the mortgage. The borrower must eventually leave the home, and the home may be sold at a public auction. In some cases, a court gives the lender ownership without a sale.

We’ll review what you should know if you’re facing foreclosure, as well as what to know if you’re looking to buy a house in foreclosure.

• What happens when your house goes into foreclosure?
• Can you get out of foreclosure?
• How foreclosure affects your credit
• Should I buy a foreclosed home?
• Next steps: What should I do if I need mortgage relief?

What happens when your house goes into foreclosure?

Each state handles foreclosure differently, so it’s important to find out which types of foreclosure your state allows and what the timeline is.

Types of foreclosure

There are typically three ways a lender could foreclose on a home after a borrower defaults, depending on the state’s laws.

1. Judicial foreclosure — The lender sues the borrower, and the borrower is given a deadline to make a payment. If the borrower misses this deadline, the court or sheriff’s office may put the property up for sale by auction. Judicial foreclosure is allowed in all states, and in some states it’s required.
2. Power of sale — This type of foreclosure is allowed only if the mortgage contract includes a power of sale clause. If it does, the lender can tell the borrower to resume payments by a deadline. If the borrower can’t meet the deadline, the lender or mortgage holder sells the property at auction. Not all states allow this type of foreclosure, and some that do require the foreclosure to be approved by a judge.
3. Strict foreclosure — The lender sues the borrower who has defaulted. If the borrower can’t pay the mortgage in time as ordered by the court, the property goes directly back to the mortgage holder. Strict foreclosure usually isn’t carried out unless the borrower owes more than the home is worth, and it’s possible in only a few states.

The foreclosure process

The details of foreclosure proceedings vary by state and type of foreclosure. Here’s more information on the stages that are usually involved.

• Stage 1: Typically, after a homeowner fails to make a mortgage payment, the mortgage servicer calls or sends a letter. Once payment is overdue by 10 to 15 days, the mortgage servicer usually begins to apply late fees. It’s important to try to work with your lender if you’re seeking mortgage relief options.
• Stage 2: If a homeowner doesn’t pay the mortgage for a second month in a row, the mortgage company will likely continue trying to contact the borrower. After the third consecutive month of missed payments, the mortgage company sends the borrower a document called a “demand letter” or “notice to accelerate,” which warns that foreclosure will begin if a specified payment isn’t made by a deadline. The deadline is usually set at 30 days out, or at least 120 days after the person became delinquent on the mortgage.
• Stage 3: If the mortgage isn’t paid in full by this deadline, and the borrower and mortgage company don’t arrive at an agreement to get the mortgage back on track, the mortgage company can begin to foreclose on the house. When this happens, a sale is scheduled. The borrower is told when the sale will take place. The day of foreclosure can be set as soon as two to three months after the demand letter was sent out, depending on the state’s timeline.
• Stage 4: In some states, a redemption period may follow the sale. This is a window of time when the borrower can get the house back by paying the total amount currently owed on the mortgage and the costs from the foreclosure, such as attorney’s fees.
• Stage 5: If no redemption period is allowed or if the homeowner doesn’t come up with the money to reclaim the property, they’re given a date to leave the house. A borrower who doesn’t leave by that date can be evicted.

Can you get out of foreclosure?

Getting out of foreclosure isn’t impossible. There are steps a homeowner can take at different stages of the process. If you’re less than three months delinquent on the mortgage, usually you can temporarily hit pause on foreclosure by making a single payment. If the balance isn’t paid in full, the homeowner will still need to reach an agreement with the mortgage company to bring the account current.

After you’re three months behind, you may be able to get out of foreclosure up until the home’s sale by reaching an agreement with your mortgage company or paying the balance owed on the mortgage plus the total costs incurred from the foreclosure.

Once the property is sold, you can get the house back only if there’s a redemption period and if you cover the foreclosure costs and pay the current mortgage balance before that time is up.

How foreclosure affects your credit

A foreclosure hurts your credit: It typically appears on your credit reports for seven years, and it may be very difficult to get approved for another mortgage during that time. You typically can’t get an FHA loan within three years following a foreclosure.

Should I buy a foreclosed home?

Whether buying a foreclosed home makes sense for you depends on your goals. Foreclosures may sell below market prices, which can make them attractive to investors or to homebuyers who want to save on the purchase price. And some people buy foreclosures to fix up properties that are in bad shape and to promote the well-being of a neighborhood.

But foreclosure sales don’t necessarily provide the same protections for the buyer that ordinary home purchases do, so it’s important to know what you’re getting into. Foreclosures are often sold “as is,” so there is no opportunity to negotiate for repairs or to insert stipulations about the condition of the home in your contract.

You may be required to pay in cash, and you may not be allowed to conduct a home inspection before buying a foreclosed home. It’s crucial to research a foreclosed property carefully before making a bid.

Prospective buyers should also find out whether there are any unpaid back taxes on the property or if there are liens that aren’t being discharged by the foreclosure sale. The buyer may be required to pay these claims on the property.

By law, public notice of upcoming foreclosures must be posted before a sale. You can find listings on government websites or in local newspapers. If you’re the highest bidder at the foreclosure auction, you may need to wait for a court date to get the deed to the property.

And if the previous homeowner is still living in the home, you may need to go through the eviction process before you can move in. If tenants are living in the home, you may be required to give them extra time to leave, or you may have to honor their lease.

Next steps: What should I do if I need mortgage relief?

If you’re at risk of falling behind on your mortgage or if you’ve already missed a payment, call your mortgage servicer right away to discuss mortgage relief options. You may also benefit from talking to a foreclosure prevention counselor approved by the U.S. Department of Housing and Urban Development to get advice for free.

Depending on your situation and the types of mortgage relief your mortgage servicer may offer, you might be able to avoid foreclosure through one of these alternatives.

• Forbearance — You make smaller payments or no payments during the forbearance period. Afterward, you go back to your regular monthly payments and must pay back the amount you postponed.
• Loan modification — Your mortgage company changes your loan so that you have a lower interest rate or more time to pay it back, resulting in a more affordable monthly payment.
• Refinancing — You take out a new mortgage and pay off your previous mortgage with it. Your monthly payments could be more affordable if the new mortgage has a lower interest rate or a longer term.
• Selling your home — Selling your home may provide all or part of the amount you need to pay off your mortgage. In some cases, you can get out of a mortgage this way even if the sale doesn’t cover the full amount you owe.
• Bankruptcy — If you have income and file for Chapter 13 bankruptcy, the court may give you a repayment plan allowing you to get caught up on your mortgage over three to five years and to keep your home. But be aware that filing for bankruptcy comes with serious financial and credit consequences.